The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 13 April 2016 the MPC voted unanimously to maintain Bank rate at 0.5%. The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

Nothing to happen before the fog of Brexit lifts

Ian Kernohan, Economist at Royal London Asset Management, said: “The MPC’s view of the world has not changed much since the February Inflation Report, although they do note the recovery in risk assets, some better economic news from China and some softer data in the US.

“The big issue is of course the Brexit vote, and they make explicit reference to this in the statement as a potential source of weaker economic activity in the first half of the year. The MPC has reiterated its expectation that rates are likely to rise at some point, but nothing will happen until the fog of Brexit clears.”

Are we at an inflection point?

Nick Dixon, Investment Director at Aegon UK, says: “Given sluggish wage growth, there’s no immediate pressure for the MPC to take action. However, we may be on the cusp of an inflection point where inflation becomes a greater a concern. This could be triggered by strengthening commodity prices, potential declines in sterling, reinforced by the possibility of Brexit. In combination these inflationary drivers could lead to interest rates rising at a quicker pace than the yield curve implies.”

Currency markets fixated on Brexit risk

Andy Scott, economist at HiFX comments on this morning’s warning from the Bank of England re Brexit: “The markets are fixated with the UK’s EU referendum as far as Sterling is concerned due to numerous bodies and organisations, including the IMF this week that have warned over the risks of Brexit. It continues to be the major underlying reason for Sterling’s weakness against the Dollar this year, whilst every other major currency is currently stronger against the Greenback.

“The BoE referenced the link between these two occurrences and therefore whether it will last. We expect Sterling to strengthen in the event of a vote to stay, but would still urge corporates to have good hedging against a potential 10% fall in Sterling if the vote is to leave. The latest polls still indicate it being too close to call and a big risk lies ahead.”

“The most likely dissenter, arch ‘hawk’ Ian McCafferty, dropped his call for higher rates in February, and the economic data has arguably weakened since then.

“Continuing weak inflation – despite Tuesday’s bigger-than-expected jump to 0.5% – puts no pressure on the MPC to raise rates. Furthermore there are growing concerns that the economy is stuttering. Respected think-tank NIESR forecast GDP growth will come in at just 0.3% in the first quarter – much slower than Q4 of 2015. Productivity continues to disappoint, which is likely to preclude a meaningful acceleration in wage growth.

“Consumer spending, aided by low inflation, low unemployment and rising wages, has been the engine of economic growth lately. But recent surveys suggest consumers reined in their spending in March – perhaps the first sign of nerves ahead of June’s EU referendum. Today’s minutes from the Bank of England note that uncertainty over the referendum has begun to affect the real economy.

“Overnight Index Swap markets this morning were pricing in just a 0.6% chance of higher rates by December. More interestingly they also show a 28.2% chance that rates will be cut this year. Bank governor Mark Carney seems to have moved away from his definitive stance that the next move will be up rather than down, opening up the possibility that one or more MPC members could vote for lower rates in the coming months.”